JOHANNESBURG – South African inflation stayed well within the central bank’s target range in May, making it more than two years since it last breached the ceiling, raising the possibility of a rate cut as calls for the bank to support the flagging economy swell.
The South African Reserve Bank (SARB) is under pressure to do more to stimulate growth after the economy shrank by 3.2% in the first quarter, its worst contraction in 10 years.
The SARB’s policy committee in May voted 3-2 to hold the benchmark repo rate at 6.75% for the third meeting in a row, despite inflation remaining well below the upper end of its target of between 3% and 6%.
Last month, hours after the shock growth contraction, the ruling African National Congress (ANC) called for the bank’s mandate to be expanded to target growth and unemployment, setting off a public spat with government officials that spooked investors and hurt the currency. [nL8N23I50T]
“Inflation has surprised to the downside for the last few months and the SARB has acknowledged that. On top of that there’s the weak growth environment, so I think they’ll cut by 25 basis points at the July meeting,” said analyst at NKC African Economics Elize Kruger.
Price-growth came in at 4.5% year-on-year in May from 4.4% in April with higher fuel prices the main factor behind the modest acceleration. Fuel prices have increased by 11.6% over the past 12 months.
On a monthly basis, consumer prices rose 0.3% in May, slower than a 0.6% increase in April.
Central bank Governor Lesetja Kganyago said last week the bank’s predictive model suggested it had room to cut rates over the next year or so.
“The economy could actually do with a 50 basis point cut but the SARB will probably be too conservative given the current exchange rate over the last few weeks,” Kruger said.
The rand turned weaker after the inflation data after a rally in the previous session had lifted it to a 2-week high. At 0840 GMT the rand was 0.22% weaker at 14.5400 per dollar. – Reuters Africa